Can Gold Replace or Prop Up a Crumbling Monetary System?

By George Zurakowski

Much has been whispered, postulated and debated over the decades regarding gold’s potential and place in a new global monetary system. Why? Gold has had a long monetary history, whereas fiat currencies, even the strong ones, have not survived the tendencies of rulers and governments to debase their currencies after insurmountable debt accumulation to fund their expanding programs, be they military, social or other.

And in recent years, fears have increased steadily over the parabolic increase in sovereign indebtedness and the concomitant steady erosion in the value of world currencies, with particular focus on the US dollar, since it is (still) the world’s main trading and reserve currency.

But a little perspective is in order here (all in $USD):

World Stock Exchange Capitalization        : $130 trillion
US Stock Exchanges alone                        : $62 trillion
World Sovereign Debt                                : $100 trillion
World M2 Money Supply                            : $123 trillion 
US National Debt                                        : $38 trillion
US M2 Money Supply                                : $22.3 trillion
US Federal Annual Spending                        : $7.4 trillion
USD Cash Notes in World Circulation        : $2.4 trillion 
Value of Supposed US Gold Reserves        : $1.1 trillion

Yes, look at that last figure! The vaunted US national gold hoard, the biggest in the world, is only valued at today’s $4200 USD per ounce at a paltry $1.1 trillion USD. If sold today, that wouldn’t even pay for 8 weeks spending by the US federal government.

A quick perusal of the above table reveals that current gold/silver valuations are relatively insignificant compared to money in circulation, stock and bond valuations, national government annual spending, etc.
So, what about all the gold that has ever been mined? Well, that is about 7 billion troy ounces, or about $29 trillion USD at $4200 USD an ounce. But about 45% of this gold is estimated to be in jewelry. Only 17%, $5 trillion USD is estimated to be held by central banks - also pretty paltry.

The problem then is this: if gold is to become a significant player in the current or future monetary system, its value has to be much, much higher than today’s $4200 USD a troy ounce.

To conclude, I see two outcomes:

1) Gold increases in value by another 10 to 100 times! to facilitate a future major role.

OR

2) Gold will not play any major role and other alternatives emerge with gold prices continuing to meander, jumping and falling as they have in recent decades, based on inflation, relative monetary tightness/looseness, geopolitical concerns, flights to safety, etc.

The Linkage Between Money Supply and Inflation

For many years now but especially after the 2008/2009 great financial crisis (GFC), a number of observers began to fret about the effect of increases in the money supply on inflation. At the same time, however, other economists and pundits voiced the opposite – inflation was too low and deflation was the real danger.
Well, depending on where you looked, since 2000, we did have some serious inflation. But in consumer prices, it was a comparative yawner. The potentially dangerous consumer price inflation (with resultant higher interest rates) materialized but briefly on the eve of the GFC before diving and then recently re-emerging in the second half of 2021.
 
But if one looked at asset prices, it was another story altogether. Stocks and the housing markets took off after the GFC and so did cryptocurrencies. Asset inflation swallowed the bulk of the easy money. And the gains were breathtaking.

.

 
 
Then came COVID and the gains in the money supply became increasingly breathtaking. And now we begin to see the attempt to “disconnect” the money printing from the inflationary beast on our doorstep. So now we have talk of supply line problems, crop failures, wars, floods, etc. Well, some of this is true – we have a potential perfect storm. COVID and other disruptions reduced or moderated economic outputs while vast sums of money were printed and distributed by nations around the world – a classic case of more and more money chasing fewer (or at least not an increasing amount of) goods.
But what really caught my eye was a particular apparent attempt to downplay the role of the money supply in any potential future hyperinflationary scandal. And it was captured brilliantly by ShadowStats. Here is the official US M1 (annotated):

 
Well, sometime in 2020, M1, which was a narrow measure of money supply was redefined to greatly broaden it and include most of the broader M2. Look at the bend in the chart. This had the effect of making it appear that M1 growth was being “moderated”. But look at the ShadowStats chart using the original definition (not much change in the slope, eh?):

The enormity of the increase in M1 is unprecedented in historical terms. It’s a very dangerous experiment in teasing the hyper-inflationary dragon in its lair. And any attempt to actually reduce the pace of stimulus, never mind withdraw it, will likely have disastrous consequences for markets and individuals.